The Imminent AMT Fiasco

From the IRS’s perspective, Congress needs to do something with the AMT soon because retroactive tax legislation can have very bad consequences for tax administration. We need only look back at the fiasco that ensued last year after Congress passed the Tax Relief and Health Care Act of 2006 in December, after the IRS had already finalized and printed all the tax forms.

We wrote here about the Treasury Inspector General for Tax Administration (TIGTA) report that detailed this problem. Ultimately, the late extension of the sales tax deduction, as well as other tax incentives included in the act, caused major headaches for both taxpayers and the IRS, and contributed to millions of eligible taxpayers missing the deduction completely and paying more in taxes because of it.

Once again, Congress is getting dangerously close to the IRS’s deadline. In his article in the Washington Post yesterday, Jeffrey H. Birnbaum had this to say:

Congress has known all year that it must “patch” the AMT to exempt some 21 million middle-income Americans from the levy, which was originally meant to target the wealthy. But in a letter to lawmakers yesterday, [Treasury Secretary Henry M.] Paulson said that if the AMT is unchanged by the end of the year, 25 million households would pay an average additional $2,000 in federal income tax. …

… Unless the AMT is altered by mid-November, the IRS will not have enough time to reprogram its computers and rewrite its instruction kits. If that happens, as many as 25 million additional taxpayers could face delays in processing of their returns and payment of their refunds.

Democrats have promised in the past that they would fix the AMT, but so far nothing has been done. Much of the delay, Birnbaum says, is due to disagreement between Democrats and Republicans over how, if at all, to pay for an AMT fix. Democrats have been sticking to the “pay-go” rules, which require that any tax cut be paid for either by a tax increase or a spending cut. Republicans have been saying that fixing the AMT is not a new tax cut, but a way of preventing a tax increase. However, Birnbaum says that recently Democrats have begun to realize the immediacy of the situation:

Last week, Democrats in the Senate began for the first time to seriously consider altering the AMT without paying for the change, as the deadline for change is so tight and its cost is so steep.

Linda Stiff, acting commissioner of the IRS, said Congress has never waited this long to pass the patch, and the result could be an unprecedented upheaval in the filing season. “We don’t recall anything of this magnitude,” she said.

A bill was introduced today by Charles Rangel (D-NY), Chairman of the House Ways and Means Committee, which includes an extension of the current law AMT for 2007. This patch would extend for one year the nonrefundable personal credits and increased exemption amounts that are set to expire after 2006. While this is a step in the right direction to prevent an administrative mess, the bill includes other measures such as the repeal of the AMT after 2007 and other tax increases, and these may cause further delay.

The IRS sends the 1040 forms to be printed on November 7, and they need to finalize the rest of the forms by November 16. If Congress doesn’t do something with the AMT by then, the updated forms will not be available to taxpayers until after the filing season has started and the original incorrect forms have already been issued. As if taxpayers needed any more confusion, they will then be stuck trying to figure out which set of forms is the correct set.

When a patch is finally enacted, returns are processed, and refunds are issued, it will only be after week of delays. Taxpayers will have to wait for the correct forms before they can file. And it could take the IRS up to 13 weeks simply to update its computer systems to be able to handle whatever change Congress enacts. In the end, all this results in an even greater and longer lasting loan to the government and more confusion for taxpayers.

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